The European Commission has recently adopted a Communication on the EU budget review, starting up the discussion on the financial framework post 2013. The Commission has not presented yet concrete proposals, and has not given any idea about the size of the budget. But, it has presented its ideas on how to reform the EU budget. Now, we have confirmation of what the Commission is up to as regards the reform of the EU financial resources – it wants to introduce EU taxes and scrape the UK rebate. As Bill Cash said. "With the rebate and tax proposals, the EU is making demands that are completely unacceptable to the British people."
The Commission is seeking the Council and the European Parliament views on the budget review, then it will present, before 1 July 2011, a legislative proposal for a regulation on the next multiannual financial framework after 2013 and a draft decision on own resources. The Commission’s ideas will be then translate into concrete proposals.
To recall, the Lisbon Treaty provides for a legal base for the financial perspectives now called multiannual financial framework. The Council, acting unanimously, shall adopt the multiannual financial framework, after obtaining the consent of the European Parliament (special legislative procedure (assent procedure)). Therefore, Member States have the right to veto the definition and establishment of their contribution to the Union budget and the adoption of the financial framework. However, the Treaty provides that “The European Council may, unanimously, adopt a decision authorising the Council to act by a qualified majority when adopting the regulation” laying down the multiannual financial framework. In this way, it would be easier to adopt the financial framework since Member States would not have a veto power. This will put the UK in a very weak negotiation position, therefore such decision shall never be adopted. Under the TFEU if the financial framework has not been adopted “by the end of the previous financial framework, the ceilings and other provisions corresponding to the last year of that framework shall be extended until such time as that act is adopted.”
The Commission has made clear that it is planning to introduce new financial instruments. In fact, according to the European Commission, the EU budget should be used “to leverage both funding and financing to support strategic investments with the highest European added value.” The Commission wants therefore to put in place a “more general use of the EU budget as an instrument to guarantee loans and bonds.” In his first “State of the Union” address before the European Parliament, the President of the European Commission announced plans to “explore new sources of financing for major European infrastructure projects.” Barroso announced that he “will propose the establishment of EU project bonds, together with the European Investment Bank.” Arguing that “the EU budget could attract more financial resources without having to increase itself”, the Commission confirmed, in the present Communication, its willingness of using financing instruments such as EU project bonds. The Commission has pointed out that “The Europe 2020 objectives for modernisation of the European economy will require huge investment” however, it stressed that “in the wake of the financial crisis, investors remain reluctant” and “Projects of key strategic interest for the EU are finding it impossible to secure the investment required. Consequently, according to the Commission “EU project bonds would be designed to plug this gap, to give sufficient confidence to allow major investment projects to attract the support they need.” In order to “unlock private finance”, the Commission is planning to use “appropriations from the EU budget to support projects to the extent required to enhance their credit rating, and thereby attract financing…” Hence, “The EU and/or EIB guarantees would be issued in favour of special vehicles set up by the private sector to attract capital market financing for the project.” One could wonder which legal basis the Commission is planning to use. Such plans will have fiscal implications for all EU member states, as they will guarantee them.
According to the European Commission “the current budget has proved too inflexible to meet the pressure of events” consequently the Commission wants to change the extent of the possible changes in the direction of spending as well as the procedures by which the European Parliament and the Council exercise scrutiny over such changes. The Commission is suggesting setting up an obligatory figure (5%) to increase margins so that “new priorities” can be taken into account. The Commission has also suggested other ways to increase budgetary flexibility such as “A reallocation flexibility to transfer between headings in a given year, within a specific limit” a “possibility to transfer unused margins from one year to another…” as well as “Freedom to front or backload spending within a heading's multi-annual envelope, to allow for countercyclical action and a meaningful response to major crises.” So much for budgetary discipline.
Unsurprisingly, the main focus of the Commission EU budget review is the reform of the EU financial resources. The European Union has its own resources to finance its expenditure, which are collected by the member states and then transferred to the EU budget. There are three types of EU’s own resources: traditional own resources (TOR) which consist of customs duties and sugar levies and account for around 12 % of total EU revenue, the own resource based on value added tax (VAT) which is levied on Member States' VAT bases, is therefore a proportion of VAT revenue collected by the Member States, and represents 11% of the EU revenue and the annual direct contribution by each member state based on their gross national income (GNI), which accounts for around 76 % of total EU revenue.
The Commission has pointed out that “With the exception of customs duties stemming from the customs union, existing resources display no clear link to EU policies” consequently it wants to replace some or all of the abovementioned resources by an EU-wide tax. This idea is not new, the European Commission and the European Parliament have been pressure for different funding systems for the EU such as energy tax or corporate income tax, for some time. In fact, one could say that the European Commission present Communication on the budget review reflects the European Parliament demands for new own resources.
According to the European Commission the reform of the EU financing could include “the introduction of one or several new own resources” as well as “the progressive phasing-out of all correction mechanisms”, meaning the UK rebate.
The Commission is planning, therefore, to propose direct EU taxes to finance the EU's budget. If Brussels is allowed to levy direct taxes, member states would lose control over how much they send to Brussels. Member States have the right to determine their own direct taxation system. The member states are responsible to taxation policy and Brussels should be kept out of it. It is for national governments to levy taxes and not for Brussels. As Bill Cash said “The people who decide the taxation of this country exclusively are those in the Westminster Parliament on behalf of the voters of the UK.” Taxation is a key part of Member States sovereignty and such proposals would encroache on national tax sovereignty. Such proposals would entail a major transfer of powers to Brussels, which would be able to raise its own funds. It would be, therefore, another transfer of national sovereignty. The UK must veto such proposals. In fact, Lord Sassoon said "The UK believes that taxation is a matter for member states to determine at a national level and would have a veto over any plans for such taxes." The idea of direct EU taxes has not only been rejected by the UK but also by Germany and France.
It has suggested abolishing the VAT-based own resource and progressively introducing one or more new own resources to replace it. According to the Commission “by abolishing the VAT-based own resource and progressively introducing one or several new own resources as a replacement” the member states contributions would be reduced. Obviously, member states want to reduce their national contributions to the EU budget but not in exchange of having Brussels raising taxes directly from citizens and companies to fund the EU budget.
At a time when many governments are cutting budgets and struggling to contain their deficit problems without excessively increasing taxes, the European Commission comes up with the idea of introducing EU taxes. According to the Commission “The introduction of new own resources would mirror the progressive shift of the budget structure towards policies closer to EU citizens and aiming at delivering European public goods and a higher EU added value.” Citizens are already facing austerity measures therefore the last thing they need is a EU tax, which will be an additional burden. If such proposals go ahead, they would end up paying more for the EU budget than presently. Brussels should reduce member states contributions by cutting the budget not by introducing EU direct taxes to raise money.
The Commission has, therefore, presented a “non-exclusive list” of possible new EU own resources: EU taxation of the financial sector, EU revenues from auctioning under the greenhouse gas Emissions Trading System, EU charge related to air transport, EU VAT, EU energy tax, EU corporate income tax.
Financial sector taxation
A share of a financial transaction or financial activities tax is one of the options for the EU new own resources. The Commission has recently adopted a Communication on taxation of the financial sector addressing both a financial transactions tax (FTT) and a financial activities tax. The FTT would tax the value of single transactions targeting taxpayers active on the financial market and shareholders of financial institutions whilst the Financial Activities Tax (FAT) would tax total profit and wages. The Commission has pointed out that there is no “global agreement on a broad-based FTT” and that “a narrow-based financial transaction tax could be considered at the EU level only,” but “there are uncertainties about how to ensure a fair and workable solution without global consensus.” The Commission has stressed that “applying a very low rate on a large tax basis would allow raising significant amounts of tax revenues.” The Commission is aware that it will not be easy to introduce such tax, it has identified problems such as operating costs. It pointed out that “The legality of any FTT could also be challenged with regard to the EU treaties and WTO GATS provisions.” Yes, there is no legal basis. Moreover, the Commission has stressed “There could also be a perceived national imbalance as, due to network externalities, financial asset transactions are highly concentrated in certain markets.” According to the Commission the FAT revenue “is not as concentrated as in the case of a broad-based FTT” therefore the “FAT would be better suited to raising revenue for budget consolidation purposes.” If such proposals go ahead the UK could become the main net contributor to the EU budget. As Christopher Booker has recently written in the Mail "An EU tax on each financial transaction would result in Britain having to pay up to ten times as much as countries like France and Germany – and could even result in a large part of the global finance industry packing its bags to move out of Britain and the EU altogether.”
Auctioning of greenhouse gas emission allowances
Whereas presently 90% of pollution allowances are given to installations for free under the revision of the Emission Trading Directive from the third trading period starting in 2013 auctioning of allowances will be the rule for the power sector. Under the directive it is for Member States to decide the use to be made of revenues generated from the auctioning of allowances. Nevertheless, 50% of the revenue generated by the ETS should be used for climate change protection measures in developing countries and inside the EU, to reduce greenhouse gas emissions, to fund contributions to the Global Energy Efficiency and Renewable Energy Fund, and measures to avoid deforestation. Obviously, the Member States do not want Brussels to decide how they should spend revenue from auctions. However, now the Commission is planning to transfer the proceeds from allowances auctioning to the EU budget. It said that “the revenue could be partially 'earmarked' for climate and energy priorities.” According to the Commission revenue from auctioning is “a charge closely related to pollution by economic operators, it is in line with the polluter-pays principle (article 191 of the Lisbon Treaty)” consequently “This resource may not need to transit via Member States treasuries.” The European Council agreed, in 2008, that 12 per cent of the share of proceeds from all auctioning of emissions trading allowances are to be reserved for a "solidarity fund" intended to compensate Central and Eastern Europe new member states for the cost of meeting the greenhouse-gas emissions targets. The Commission believes that such revenue could amount around EUR 20 billion in 2020 to the EU budget, after the transfer of 12% of the revenues to the above mentioned Member States.
Aviation charge
The Commission has suggested the introduction of an aviation duty on freight and passenger flights entering/leaving the EU. According to the Commission this will be “a charge per flight” and the amount would vary according to the aircraft technical characteristic so that “the more efficient planes would pay less.” The Commission has estimated that such income would have been EUR 12.8 billion in 2006 but is expecting a bigger figure on the amount collected for the aviation duty after 2013. If the aviation duty is introduced passengers will see an increase on the price of airline tickets.
EU VAT
The Commission is planning to abolish the current ('traditional') VAT-based own resource and is considering combining the national and an EU VAT rate which would be defined in the framework of the own resource Decision and/or its implementation rules. Hence, a direct EU VAT would replace the levy on national VAT. The EU VAT payments would appear as a separate tax on each individual invoice next to the national VAT payment. The EU VAT would be collect by the Member States and transfer the proceeds to the EU budget. Such proposal is very likely to increase tax burden for citizens. The Commission has estimated, in 2004, that revenues of a 1% EU VAT would amount to EUR 41.0 billion.
EU energy levy
The Commission is also considering existing taxes on energy consumption as a potential new own resources for the EU budget as well as an EU levy on energy/CO2 emissions. According to the Commission “Member States could apply national duties ('surcharges') on top of the EU duties” and then they “would collect the energy levy and transfer the proceeds to the EU budget.” Hence, there would be extra taxes on fuel. The Commission has estimated that “with a levy of 330 euros/1000 litres of motor fuel (the minimum rate), an energy tax could yield EUR 109.8 billion (estimate for 2002).” The Commission has stressed that “these efficiency gains would only be possible if the total rates resulting from the EU rate combined with Member States surcharges were more harmonized than the current rates or if a reform of the existing framework for energy taxation could be facilitated by linking it to a reform of own resources.” It is important to recall that Algirdas Šemeta, the European commissioner for taxation, is planning to oblige Member States to levy a CO2 tax on fuels in order to cut emissions. He is planning to review the Directive on energy taxation. Such proposal would breach the principle of subsidiarity. According to a draft prepared last year by the Commission's taxation and customs department, Member States would be obliged to levy a CO2 tax on fuels in order to cut emissions. The Commission wants to introduce minimum levels of taxation on different types of fuels related to the intensity of their emissions.
EU Corporate Income Tax
It is important to mention that the European Commission has been trying, for a long time, to introduce a Common Consolidated Corporate Tax Base (CCCTB). Several Member States such as UK and Ireland have been showing their opposition to such proposal. Even so, despite all the opposition towards this measure, the European Commission wants to proceed. Therefore, if a unanimous agreement will not be reached at the Council, Algirdas Šemeta will present the proposal under “enhanced cooperation." And now, the Commission is planning to introduce an EU Corporate Income Tax (EUCIT) as a new EU own resource, replacing current national rules and bases with an uniform EU corporate tax rate which would be applied to the common corporate base of corporations. According to the Commission “Member States could continue to apply a national rate to this new base” or “the EUCIT could be a percentage of each national company tax.”
To recall, the Treaty provides that “The Union shall provide itself with the means necessary to attain its objectives and carry through its policies." Under the provisions concerning the system of own resources, the Council acting unanimously on a proposal from the Commission through the special legislative procedure (consultation) shall adopt a decision setting up provisions concerning the system of own resources of the Union. The Lisbon Treaty has provided that such “decision shall not enter into force until it is approved by the Member States in accordance with their respective constitutional requirements”. The Lisbon Treaty has also specified that the Council “may establish new categories of own resources or abolish an existing category.” Furthermore, under the TFEU, if the Council Decision setting up provisions concerning the system of own resources of the Union provides for implementing measures the “Council, acting by means of regulations, through a special legislative procedure (assent procedure), shall lay down implementing measures for the Union’s own resources system.” Such implementing measures will be adopted by a QMV in the Council, and after the European Parliament consent. This includes matters such as determine the methodology used to calculate the UK rebate.
According to the Commission “Reinforced spending for growth and jobs, energy, climate change and the external projection of Europe's interest would reduce the need to maintain correction mechanisms.” Moreover, the Commission has said that “The composition of expenditure of the next Multiannual Financial Framework and other reforms of the own resources system will determine whether correction mechanisms are justified in the future.” Unsurprisingly, the Commission wants to scrap the UK rebate. In fact, the EU budget commissioner, Janusz Lewandowski, has recently said that "The rebate for Britain has lost its original justification." In 2005, Tony Blair gave up a large part of the UK rebate, which, has already cost to the UK economy billions of pounds. Downing Street replied to the Commissioner comments, saying “Without the rebate, the UK’s net contribution as a percentage of national income would be twice as big as France’s, and one and a half times bigger than Germany’s.” It was noted that the UK is paying €38 billion and without the rebate it would have paid €75 billion over 2007 to 2013. According to a report published by the Office for Budget Responsibility, the UK’s net expenditure transfers to EU institutions is set to rise from £6.4 billion in 2009/10, to £8.3 billion in 2011/12, to £8.4 billion 2012/13, to £9.4 billion in 2013/14, to £10.3 billion in 2014/15. George Osborne has made clear that the UK is “not going to give way on the abatement [rebate].”
